Check All Types of Attribution

(Posted July 5, 2006)

Question 287:Is the following a controlled group: a C Corporation is owned by 2 sisters (the first owns 77% and the second owns 23%). The first sister is a 99% limited partner in a partnership; the corporation is the 1% General Partner. The corporation sells household remodeling items; the partnership installs the items.

Answer: You don't have a controlled group but you do have a group of trades or businesses under common control. Let me explain, with references to the 4th edition of my book, Who's the Employer?. (Subscribers can click to view online the text of these references.)

The entities aren't a controlled group, because they aren't both corporations. The controlled group rules are limited to corporations. (I am assuming that the partnership has not elected to be taxed as a corporation, but as you'll see in a moment, that doesn't change the result.)

Congress realized that the controlled group rules, which apply only to corporations, are insufficient to deal with situtations such as the one here, involving unincorporated businesses. So Congress authorized the Treasury Department to adopt regulations to describe groups of trades or businesses (whether or not incorporated) under common control. [Q 12:2.] Essentially, the same pension consequences attach to controlled groups and to groups of trades or businesses under common control. [Q 12:1.]

For both controlled groups and common control, there must be a controlling interest: the same 5 or fewer individuals, estates, or trusts must own at least 80% of each entity. [Q 12:3.] (Note that for income tax purposes only, the 80% requirement has been repealed. However, thanks to Code 1563(f)(5), the 80% requirement is still in place for employee benefit plan purposes. [Q 8:11.] In running the 80% test, we generally exclude, thanks to the Vogel Fertilizer Supreme Court decision, individuals who neither own, nor are deemed to own, an interest in both businesses. [Q 8:7.]

Additionally, the same 5 or fewer individuals, estates, or trusts must own more 50% effective control. [Q 8:6.] Because the first sister has 77% effective control (the lesser of her ownership in the partnership or the corporation), that requirement is easily satisfied.

The second sister owns 23% of the corporation but has no direct ownership in the partnership. If there were no attribution rules, the sister would be out of the picture. Because the second sister owns 23% of the corporation, it would be impossible for the first sister to own 80% of the corporation.

But attribution rules must be considered. No, there isn't any attribution between the sisters. Neither sister is deemed to own the stock of her sibling. But there is attribution from a corporation to its 5% or more shareholders. [Q 9:14.] Hence the first sister not only owns her 99% limited partnership; she also owns 77% of the 1% general partner interest held by the corporation. More important, the second sister is deemed to own 0.23% of the partnership due to attribution of the corporation's general partnership interest.

Why is the 0.23% interest important? Because Vogel Fertilizer doesn't apply any more. Both sisters own an interest, no matter how small, in both businesses. And so we count the ownership of both sisters in applying the controlling interest test. Between the two of them, they own 100% of the corporation and 100% of the partnership. Result: the two businesses are under common control. So employees of both are deemed to be employed by a single employer.

It is tempting in this case to give the quick answer, "There's no attribution between sisters, so no common control." But the quick answer frequently is not the right answer. You must check every type of attribution.

Answers are provided as general guidance on the subjects covered in the question and are not provided as legal advice
to the questioner or to readers. Any legal issues should be reviewed by your legal counsel to apply the
law to the particular facts of this and similar situations.

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